Inflation Threat Disrupts Bitcoin Investors' Accounts

The Peterson Institute and Lazard’s latest analysis significantly revise inflation expectations in the US. Bitcoin and crypto asset bulls’ hopes that inflation will rapidly decrease and the central bank will implement aggressive rate cuts are beginning to weaken in the face of economic realities. Inflation rate forecasts and trend analyses for 2023 and beyond suggest that this year could be much more challenging.

New Predictions in the Context of 2023 Inflation Rate

According to the research report prepared by Adam Posen and Peter R. Orszag, the likelihood of consumer prices in the United States rising above 4% is higher than previous estimates. Looking at the 2023 inflation rate framework, the previously steady decline in the pace of price increases faces different dynamics this time.

According to factors mentioned in the economists’ report, the productivity gains from artificial intelligence and the decline in housing inflation could be offset by pressures from other sources. Particularly, tightening labor markets and labor shortages caused by deportation of immigrants could lead to an increase in core inflation.

Tariffs and Labor Market: Factors That Will Increase Inflation

Orszag and Posen explain that cost increases associated with tariffs implemented during the presidential term are passed on to consumers with a delay by importers. The cost pass-through from tariffs is expected to be largely completed by mid-2026. This transition could contribute about 50 basis points to overall inflation.

High fiscal deficits and increased government spending could act as triggers for demand-driven inflation. Unanchored inflation expectations and easing financial conditions could amplify this effect. The combination of all these factors could completely eliminate the downward pressure trends that the market has been pricing in.

Fed’s Rate Cut Expectations Are Diminishing

The rising inflation outlook indicates that the Federal Reserve may not be able to cut interest rates as aggressively as market expectations. While investment banks expect a 50-75 basis point cut this year, the crypto community envisions a more radical easing scenario.

This situation represents a significant disappointment for high-risk assets. Analysts at crypto exchanges like Bitunix emphasize that early easing by the central bank could be problematic in a structural deflation environment. In the face of productivity gains provided by artificial intelligence, delayed rate cuts could force sharper waves of adjustment.

Bitcoin and Risk Assets: Shadows of Bond Yields

US Treasury bond yields have been rising noticeably recently. The yield on the 10-year bond has exceeded 4%, and this development is weakening risk assets, including Bitcoin. This movement in the global bond market is directing investors toward safer, steady-income assets.

Currently, Bitcoin has dropped nearly 6.74% this week to $78,23K. The increase in bond yields makes investments in other assets like stocks and cryptocurrencies less attractive.

In summary, the economic dynamics following the 2023 inflation rate are beginning to question the optimistic scenarios built into the crypto market. The central bank’s limited easing cycle has the potential to significantly alter Bitcoin bulls’ expectations.